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Questions
explain the role of Bank Rate in correcting deficient demand?
Explain the role of 'Bank Rate' in removing deficient demand?
Solution
Role of bank rate to adjust deficit demand
Bank rate policy is used as the main instrument of monetary control during inflation. When the central bank reduces the bank rate, it is said to have adopted a dear money policy. The decline in bank rate decreases the cost of borrowing which increases commercial banks borrowing from the central bank. Consequently, the flow of money from the commercial banks to the public gets increased. Therefore, deflation arising due to bank credit is controlled.
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